What causes recessions Essay Example | Topics and Well Written Essays - 750 words - 1

What causes recessions - Essay Example By definition, a recession refers to a two or more consecutive quarters of a general decline in economic activity [gross domestic product] (Gwartney, Stroup, Sobel and Macpherson 171). Generally a precursor of a depression, a recession is comparatively less severe but with almost similar dramatic economic effects.   While the numerous past recessions appear unique in terms of origin, all are preceded by the Greenspan’s irrational exuberance that unduly escalates asset values (5). To be sure, there is no one single cause of a recession (Simpson 12-13). Economists are in agreement that while a significant event in a particular sector with notable economic effects may be a trigger, a number of factors often come into play to magnify economic contraction into a visible catastrophe. Accordingly, the causes are categorized into two: the demand side shocks that hit one or various components of the aggregate demand [AD] and the supply-side shocks that affect the short-run aggregate supply, inflation [through cost push], investments and business profits. According to the demand side economics, a recession can be triggered by one or a combination of: an economic slump of a major trading partner, which may be a country or region/an economic block [such as the EU]; a credit crunch driven by the inab ility of the financial institutions to meet lending requirements of households and businesses or conscious cutting back of credit through abnormally raised interest rates on loans; a sharp fall or total collapse of crucial asset prices [such as property prices]; and a trade imbalance prompted by an abnormal appreciation of the exchange rate (Tatom 2). On the other hand, the supply recession-causing shocks include: increasing international oil prices that subsequently translate into increased cost of production [through the oil costs